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I opened Call to Arms Brewing Company in 2015. About a year before, we were running around Denver with a couple of real estate brokers looking for a commercial space to lease. The truth is, I found the space, not our brokers. While they adamantly disagree, I will die on this hill.
But, I digress.
Our brokers did a fantastic job, along with our lawyers negotiating a competitive rate and term that would give us the best chance to succeed. Since 2020, we have seen an increased rate of closures for small breweries such as ours. For context, we produced 1,300 barrels last year. For any brewery, or any retail business for that matter, the two largest expenses are labor and rent. Generally speaking, businesses our size can’t do much about the increasing costs for either of these. As for labor, we certainly do not have staffing redundancies. Every employee at CTA plays a critical role in producing, marketing, selling, and planning events to serve award-winning beer with a great experience. So, for the purpose of this article, let’s focus on the rent.
Generally, we all sign triple net leases (Insurance, Property Taxes, Maintenance). For those of you who have negotiated long-term gross leases at a competitive rate, hats off to you! For the rest of us, NNNs are not only out of our control, they are simply out of control. Anyone who hasn’t been living under a rock knows costs are increasing across the board, including, most notably, property values, and as a result, the increase in property taxes.
Since these taxes are based on the assessed value of the property, they will go up in perpetuity, which is to be expected. Unless there was an unprecedented correction like 2009. From the time we opened in 2015, the building has changed hands three times. Each time, the sale price of the property has gone up and in our case, it has quintupled from its original price. This, of course, quintuples the assessed value of the building, and I think you can see where I am going here. It’s particularly bad in Colorado due to the Tabor Tax Law and how it assesses property values. I’ll let you Google that if you are really interested.
WATCH: ‘To Service Fee or Not to Service Fee’ with Call to Arms Brewing
Now let’s look at insurance. Imagine you are an insurance company insuring a $1,000,000 building in 2015. You will charge what is appropriate for that building’s value and replacement, etc. Now, let’s pretend nine years later you are the same insurance company, but you are now insuring a building that is worth $5,000,000. You better believe that you are charging more for that coverage, perhaps five times as much?
And then, of course, maintenance. All costs associated with maintenance have gone up. From the people who come out to fix your furnace at home, to the people who come to the brewery to fix a leaking urinal. However, the real issue with maintenance arises when a rooftop unit (heat or AC) fails. The typical shelf life on one of those is 12-15 years. That’s a cool $25,000 you have to spend to replace it. Not to mention, if your lease ends and you move, it stays behind.
One of my favorite parts of maintenance is “management fees.” These “management fees” are set up differently for every lease, but usually, it’s either a flat amount that increases each year or a percentage of the total cost to “manage” the maintenance of the building. Ours is the latter. What I find most interesting about the management fees is what they pay for, or in my humble opinion, what they don’t. Every time something requires maintenance in the building, I call the property manager. In response, this person then calls a repair person of their choice, which often leads to a long waiting period and a large repair bill. Seems like we could save a phone call and a buck if the property manager allowed me to do it. Does the manager call several repair people to bid on the issue? No. Do they call the same repair person they use on their other four buildings who knows they can charge whatever they want? Likely. When that plumber shows up, who meets them? Certainly not the property manager.
Another major problem related to the real estate boom that has occurred since COVID is commercial landlords are not interested in renegotiating. Why? Well, for one, most of these owners have many properties in their portfolios. All of those properties have exploded in value, so taking a tax write-off on one or two vacant properties is worth it to them. Secondly, and most importantly, with increasing building values comes increasing rental rates. Our base rental rate which was negotiated in 2015 is locked in until 2036. If we were to ask the landlords to negotiate the lease or at least the NNN portion of the lease, it’s unlikely that they would be willing to do so. They know that the space we occupy is worth way more to them with a new tenant who has to pay current market rates, which are about 70% higher than what we locked in.
Ultimately, I am committed to doing whatever it takes to keep our neighborhood breweries as a viable part of our communities. I wish I had an interesting solution, or maybe a cool new concept for all of us to bring to our landlords and regulators that could help. I don’t. Unfortunately, at the end of the day, if there is one thing I have learned in nine years of being a business owner, it’s that for every extra dollar you earn, there is an extra hand waiting to take it.
I apologize if this piece has left you feeling like you just read a BuzzFeed article about our upcoming elections, but I’ll leave you with this; I find a lot of solace in remembering everything craft beer has accomplished in its short history, or even in the 16 years since my first brewing job. The challenges back then also seemed insurmountable, and yet, here we all are.
Chris Bell is the Co-Founder/Owner of Call to Arms Brewing in Denver, Colorado. After attending the University of Colorado for Economics, he has spent the last 16 year as a professional brewer. He can be reached at [email protected].
Your not wrong. Our lease was 6K is now 19K a month. I work for the Landlord, no longer working for myself. It is unfortunate there is no more money left for reinvestment at the end of the day all sucked up by the owner of the building. Makes it very hard to survive in a down turning market.
Excellent article. Landlords often get the blame, but they also have no control over the assessed value and subsequent property taxes increasing at insane levels. People need to stop and think before they complain about the price of craft beer going up if they want their favorite breweries and brewpubs to stay in business.